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Characteristics of Oligopolies

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20th March 2002 Kingtoi Ho IB1 Characteristics of Oligopolies The definition of an oligopoly is a market structure under the control of a few firms. This structure allows for almost complete control over the market, making them price makers. As stated in Stanlake1, mostly mergers and amalgamation (combining of firms), bring about the oligopoly structure. The characteristics of an oligopoly are written below, also a large subject in Oligopolies is collusion. That is also discussed below. Characteristics given by Stanlake involve: the barriers to entry, the variation of the competing products, supernormal profits in the long-run, stickiness of price, domination of a few small firms at the top and most importantly the no-price competition undergone. Another found under the works of the Howard Community College2, are those involving the interdependency of the firms. Stanlake shows there are barriers to entry, disallowing incapable firms to enter the market. Incapability may reflect few companies having funds, legal permission or preference on part of the consumer. ...read more.


The elastic part has to do with the fear of oligopolies thinking that if they raise the prices of their product then for some reason their opposition will not. The inelasticity occurs when oligopolies believe their rivals will not cut prices when they do. The firms usually produce at point A, as this is where the optimum output is set. This optimum is what it is because it is seen as the safe point for an oligopoly to produce at. (This is in a non-collusive oligopoly, important for later.) Fig.1 This is the kink diagram. It shows where oligopolies choose their output. The fewer the firms the smaller the bend in the line. The fact that there are few firms at the top of the ladder speaks for itself. There are a few big firms at the top with a lot of control over the market whether or not they act under collusion or not. The non-price competition in an oligopoly is a very important aspect, as it allows us to look at the oligopolies future plans as a firm. ...read more.


This is because the aim of an oligopoly is to reduce the number of small-time firms in the industry by sticking together with other big guys at the top. This can be direct collusion. This is when the companies make agreements and have rules they stick to until the goal of the collusion is reached. This is mostly called a joint cartel. This in most countries is illegal and for good purposes. It involves the firms participating producing separately but acting as one firm in price and output. (Fig.2) Fig.2 This is the model of a cartel. The average cost curve goes down and the average revenue goes up. Tacit collusion is when the industries involved try to look at each other's predicted price determination and output. By doing so they can put their prices at that point as well forming a weaker less stable version of the direct collusion. This is quite unreliable as any change in price from any one firm in an oligopoly is very drastic and has extreme effects on the market. 1 Introductory Economics - Sixth edition - G F Stanlake and S J Grant - 1995 - pg.184 2 http://www.howardcc.edu/social_science/micropdf/unit-8.jb.pdf ?? ?? ?? ?? ...read more.

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